DLR, AT&T, LINN: Beware The Yield ‘Illusion,’ Says Jacobson

By Dimitra DeFotis

Said Jacobson, “The problem is that all dividends are not created equal.”

You want cash flow growth – examples he listed are Procter & Gamble (PG) and Coke (KO) – rather than companies that must go to the capital markets to fund their yield.

“Beware,” he says, of AT&T (T). Wireline is a melting ice cube and wireless is becoming more competitive. Also “beware” Linn Energy (LINE), because half of its distributable cash flow is from hedging gains, Jacobson says. (See this weekend’s Barron’s story on Linn, “Twilight of a Stock Market Darling,” subscription required.)

Another name on the beware list: a real estate investment trust Digital Realty Trust (DLR). It is a $69 stock worth $20, Jacobson says. It has a $9 billion market cap, and a 4.6% yield.

The “fundamentals are deteriorating, and rapidly. The data center business is a commodity business with no barriers to entry, recurring capex is materially higher than company represents. The dividend is not sustainable and depends on continue access to capital markets.”

True adjusted funds from operations (AFFO) is 87 cents per share, not the $3.90 per share the company reports.

Here is a smoking gun, he said. Digital changed the definition of non-recurring capital expenditures in 2011 to include maintenance capex expenditures. The company is issuing shares aggressively, and continues to acquire new assets, but that a creates a bigger cash flow hole down the road.

“Shorting stocks is hard. I ask you – do you want to pay three times book value for this?” he said. Then he showed a slide of giant data storage boxes in a room. And then, a final slide that said DLR’s dividends are being paid with funds from future investors.

Highfields Capital Management is based in Boston, and Jacobson manages $11 billion at the invetment management firm.

Digital Realty shares are $5.02, over 7%, at $64 in late trading, AT&T shares are off 21 cents, or half a percent, at $37.62, and Linn stock is down 23 cents, or 0.7%, at $34.75.

Copyright 2015 Dow Jones & Company, Inc. All Rights Reserved

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our
Subscriber Agreement
and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit